201001011L
Clarification of Certain Eligibility Requirements for the 0.5 Percent Tax Rate
Tax Code Section 171.002(c)(2) does not allow the 0.5 percent tax rate to
taxable entities engaged in retail or wholesale trade if 50 percent or more of
the entity's total revenue from activities in retail or wholesale trade comes
from the sale of products it produces or products produced by an entity that is
part of an affiliated group to which the taxable entity belongs.
Many retail and wholesale taxpayers have questioned whether the modifications
they make to goods acquired for resale rise to the level of production and may,
therefore, make them ineligible for the 0.5 percent tax rate.
Rule 3.584(d)(3) was amended recently to clarify that, in determining if an
entity is eligible for the retail/wholesale (0.5 percent) tax rate, a product
is not considered to be produced if the taxpayer's modifications to the
acquired product do not increase the sales price of the product by more than 10
percent.
Example 1: A taxable entity is a retailer in the business of selling baseball
caps that are embroidered at the shop to a customer's specifications. The
entity purchases the baseball caps from a manufacturer and sells them, without
embroidery, for $10 each. An embroidered cap sells for $18. The entity is
considered to be the producer of the embroidered caps since the modifications
made to them increases the sales price by 80 percent. If the sale of the
embroidered caps accounts for 50 percent or more of the entity's total revenue,
the entity would not be eligible for the 0.5 percent tax rate because 50
percent or more of the entity's total revenue comes from the sale of products
it produces.
Example 2: A taxable entity is a retailer in the business of selling men's
dress shirts. The dress shirts sell for $60 each. A customer may purchase a
dress shirt that is personalized with a monogram for $65. Monogramming the
shirt is not considered production because the modifications made to the shirt
increase its sales price by less than 8.5 percent. This retailer will not lose
its eligibility for the 0.5 percent tax rate because of its shirt monogramming
activities.
The loss of an entity's eligibility for the 0.5 percent tax rate does not
affect the entity's eligibility to deduct the cost of goods sold to determine
margin. Retailers, wholesalers and producers (and any entity that sells real or
tangible personal property in the ordinary course of business) may elect to
deduct the cost of goods sold to determine margin.
ACCESSION NUMBER: 201001011L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 01/01/2010
TAX TYPE: FRANCHISE